On November 26th, 2003, Congress passed the Medicare Prescription Drug Bill, which was die greatest expansion of Medicare benefits since its creation in 1965. This legislation was controversial for years due to uncertainty in both its costs and health benefits. Because it is difficult to estimate future costs and health benefits of the Drug Bill in the long run, most policy research informing the debate has either estimated how prescription drug insurance will affect demand for outpatient prescription drugs in the short term, or predicted the future costs based on a static analysis. These studies conclude that the Drug Bill will undoubtedly increase expenditures on prescription drugs

However, the Medicare Drug Bill will likely change more than just demand for prescription drugs. Because the lack of drug insurance has led to under-utilization of clinically-essential prescription drugs and negative consequences on health outcomes among elderly persons (Rogowski, Lillard et al. 1997; Federman, Alyce et al. 2001; Poisal and Murray 2001; Steinman, Sands et al. 2001), the addition of drug insurance should help to improve their health status, prevent unnecessary hospitalization, and reduce the expensive hospital care expenditures. Many policy makers have used this reasoning to argue that an increase in prescription drug consumption could be offset by lower Part A Medicare use, resulting in lower total Medicare costs.

Only a few previous studies measure a direct link between drug policy and hospital care expenditures. But none of these studies could provide direct evidence to the Medicare Drug Bill in terms of whether, or by how much, the increased use of prescription drugs would reduce hospital expenditures, especially the Medicare Part A cost, among the elderly Medicare beneficiaries in general across the nation.

This study uses nationally representative data of Medicare beneficiaries to estimate how prescription drug use affects subsequent Medicare Part A expenditures among the general Medicare population over a year. How the magnitude of this effect varies across several subpopulations with different demographic features and health conditions are also estimated. doi:10.1300/J371vl5n02_06